Austrian Economics

Updated on April 4, 2024
Article byWallstreetmojo Team
Edited byWallstreetmojo Team
Reviewed byDheeraj Vaidya, CFA, FRM

What Is Austrian Economics?

Austrian economics refers to a heterodox school of thought that human behavior significantly affects market forces. Every product’s value depends on the needs and purchasing power of the consumer. It aims to equalize the natural resources of every human being.

Austrian Economics

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It means that when consumers find a product in abundance, they will lose the need to buy it, subject to diminishing returns. It made it possible to solve the famous problem of the diamond water paradox. Many theories contributed a great deal to developing landmark mainstream economic theories like the theory of marginal utility.

Key Takeaways

  • Austrian economics refers to an economic school of thought rejecting mathematical models and accepting human aspects in formulating economic discourses.
  • Carl Menger proposed this theory while he tried to incorporate individual capital goods value in solving the price mechanism of products.
  • It solved the famous economic paradox of diamonds and water.
  • Keynesian economics differs from Austrian economics based on government interference in market regulation.

Austrian Economics Theory Explained

Austrian economics definition refers to the heterodox theory that considers the goods and services monetary values as subjective. It is so because the values of goods and services depend upon individual needs and opinions about them. So, in a way, if a person has been provided with certain goods and services abundantly, that person won’t value them. But, on the other hand, if a person has fewer of these goods and services, they will become more valuable. Thus, it forms the basis of the law of diminishing marginal utility.

Moreover, the law of diminishing marginal utility solves the question of what amount of money a person needs or feels too much. For example, one dollar note may be of zero value for a billionaire but may be too much for a beggar. In over 200 years, Austrian theory has developed helpful insights into various economic problems like supply-demand law, fundamental causes of inflation, money-making theories, and foreign exchange rate operations. However, all its views got rated as out of mainstream economic theory.

Economists can apply Austrian economics in a variety of economic spheres. Examples include the following –

  • It finds wide application in the theory of supply and demand, which states that an excess supply of goods decreases the demand for goods or services.
  • It gets visible in the open market or capitalist economic system form.
  • One can see that opportunity costs derived from leading Austrian economist Friedrich von Weiser. Also, the law of marginal utility uses this theory.
  • One may also confirm that the value of goods gets determined due to the role that time plays.

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History

Carl Menger developed this economic theory while trying to establish the relationship between the value and utility of a product for the consumer in 1871. Menger believed that a product’s value depends on the satisfaction degree a human want.

According to Mengers’ Austrian economic books, economists consider abundant resources less critical, whereas they consider scarce resources most significant. For example, take water that one finds abundantly; one uses it unwisely and least efficiently, whereas diamond gets high utility importance due to its scarcity (diamond – water paradox).

Menger’s Austrian theory profoundly impacted a critical mainstream economic theory: the law of demand. Another mainstream economic theory called the theory of marginal utility derives from it. Moreover, economists cannot achieve central planning of resources since a complex economy needs accurate market prices.

Keynesian vs Austrian Economics

Although both theories deal with economics but are different. Let us observe their differences in the following table:

Keynesian EconomicsAustrian Economics
Keynesian economics believes in government intervention in market price regulation.Austrian economist believes that there should be zero government intervention in market prices.
They believe that mathematical models can provide solutions to all economic problems.The social and human aspect gets considered by Austrian economists while dealing with economic problems.
According to them, the government plays a vital role in all systems of the economic cycle. They do not find any merit in using governments for any economic cycle.
Here, the economists treat all capital goods as homogeneous. Austrian economists tear different capital goods differently as per their purpose served. 
Keynesian economics believes in government intervention in market price regulation.They believe that markets should not get regulated and should be left alone to self-regulate.

Criticism

Austrian economics has criticized mainstream economics on many counts. Those points of Austrian economics debunked gets listed below:

  • The efficiency of self-regulated markets gets debunked by the financial crisis of 2008.
  • High tax imposition and government spending do not invade social freedom.
  • Control of the money supply gets difficult as opposed to the theory.
  • The gold standard creates high deflation and unemployment problems.
  • Its economic models, like Austrian economics inflation, get too vague and subjective for day-to-day applications.
  • According to the theory, economies affected by financial depressions find it challenging to recover independently.
  • The assumption that consumption increases during depression get criticized too often as the reverse happens.
  • As per United States data, one considers the credit cycle theories wrong.
  • Finally, the most crucial criticism of the theory is that it’s only a verbal argument without any scientific basis.

Frequently Asked Questions (FAQs)

1. Where to study Austrian economics?

To study Austrian economics, one must enroll in institutions like the University of Missouri in Columbia, San Jose State University, San Jose in California, or George Mason University in Fairfax, Virginia. These are just a few of the institutions; one may research to find out a college depending on their location.

2. Does Austrian economic use Math?

According to these economists, a human being’s nature is very complex to fit into the mold of math. So, they do not use math in their school of thought or analysis.

3. Is Austrian economics wrong?

No, one can not say that Austrian economics has been wrong, but the way it sees economic situations and provides solutions to them are pretty different. Moreover, many famous theories of mainstream economics can be traced back to Austrian theory, like the law of demand.

4. What is Austrian economics in simple terms?

Austrian economics, in simple terms, can be understood as the application of the human aspect and real-life situations on product utility and consumer demand.

This article has been a guide to what is Austrian Economics and its theory. Here, we explain it in detail, along with its history, criticism, & comparison with Keynesian economics. You may also find some useful articles here-

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  1. Mehryar says

    Was briefly n nice tnks

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